Tales From the Floor
When the markets go down, they look horrible. When they go up, people become complacent.
With the Fed so far behind the 8-ball, Goldman Sachs has raised its rate-hike call from 5 this year to 7. There has also been talk of an out-of-meeting rate hike (which many people have never seen).
I can’t remember the exact date, but there was a guy by the name of Burt (I will leave his last name out) that worked at Bear Stearns for many years and traded his S&P account through my desk on the CME floor.
One Tuesday, he called the desk and said he had some very important information about the Fed, saying it was going to raise interest rates “out of meeting” on Thursday morning. We heard a lot of stuff on the floor, but nothing like this, so we told a few of the larger desk customers. One, in particular, was an $18 billion hedge fund.
Nothing really happened Tuesday or Wednesday, but around 10:30 Thursday morning, the SPU — those were the big S&P contracts — started getting weak. Thirty minutes later and the Fed raised a 1/4 point and the S&P sold off sharply. The hedge fund kept calling me to know if I could get more information like that, but we knew that was a once-in-a-lifetime shot.
That all said, these are very different times.
Our View
Bonds are falling, inflation is rising, crude oil is at an eight-year high, debt is piling up, supply chains are screwed up, Covid is still raging and the world is going toe-to-toe with Russia. When you add it all up and consider all the mega swings, I think it spells trouble.
I don’t know exactly how to say it other than it feels like something big is going to happen.
The PitBull has said the wild swings are a precursor to the future. I think it’s time to start bracing for higher interest rates and lower stock market prices. Will the markets shake off the current weakness? For now, any 80 to 120 point rally will be a sale in my book.
We are only six weeks into the year and it could take several months and multiple Fed meetings to get the markets back in better condition. On late Friday, Goldman Sachs strategists cut their year-end target for the S&P to 4,900 points, down from 5,100. This is in line with my end of 2021 call that the ES would close on its highs in 2022.
The week starts out with St. Louis Fed President James Bullard on CNBC’s “Squawk Box” this morning. Traders will be paying special attention to his comments after he surprised markets Thursday when he called for the Fed funds rate to be higher by 100 basis points or 1% by July. That’s followed by the Fed Minutes Wednesday.
This week could prove to be just as volatile as traders continue to get a read on the Fed’s next move and the ongoing tension over Russia and Ukraine that continue to haunt the markets.
Our View — Part II
After trading up to 4585 earlier in the week, the ES’s two-day loss over Thursday and Friday amounted to a 3.7% decline, the largest two-day percentage decline since October 2020. I think this is what PitBull was referring to regarding the effects of all the big moves up and down.
In other words, it’s not a good sign.
He also said, “under the right conditions, the ES could go straight to 4200.”
I think it’s fair to say “we live in very trying times.” I doubt Putin will attack Ukraine by Monday’s open and I don’t think the Fed is going to do an out-of-meeting rate hike. However, that doesn’t mean the trade won’t be volatile.
I can’t rule out a 0.50% hike in the March meeting, but if the Fed does raise rates this week, the bottom will fall out.
As traders, it’s always a good idea to play both sides, but what’s even more important is following the trend. You may not like lower prices, but they are coming and it’s time to act accordingly.
I don’t want to get too far ahead of myself — especially amid all of this volatility — but if the ES does start breaking, I think it’s going a lot lower. That said, if the ES opens down sharply lower I think you can buy the dip and sell the rallies.
Our Lean
The day after President’s Day in 2021, the ES was trading 3960. Even with the increase in volatility, it’s currently trading 4420. For the Nasdaq futures, the NQ was at 13,900 and now it’s at 14,320 — even with all the selling in growth stocks, ARKK, etc.
With Inflation at the highest point in 40 years — the price of a filet up 145% from last Valentine’s Day — and gas prices rocketing, there is no way the stock market should be higher than it was last year.
In the second week of Feb. 1989, the Nikkei fell from 38,000 to 32,500 in 5 trading days. As we all know, anything can happen, but I think by the end of March, the ES could go to 3650 to 3800, the NQ to ~12,400, and the YM to the 29,000 to 30,000 range. Again, that’s under the right circumstances. I don’t say that to scare people but to put in perspective what the reality could be.
If Russia invades Ukraine this week, the markets will sell off hard, rally for 1 or 2 days, and resume their downward push. I think we all know what happens after the ES and NQ sell off hard — they usually bounce.
If the ES gaps down hard, you can buy the early weakness and sell the rally or just be patient, let the buy programs exhaust themselves, and sell the rallies. 4350 is a key level on the downside.
It’s Opex week and with that, here are the historical February stats for the week.
Daily Recap
In the end on Friday, bonds were making new lows early in the day and that drilled stocks. But then all sorts of stuff got whacky at the end of the day due to the headlines calling for a Russian invasion. Oil was over $94, bonds were fetching a bid — flight to safety — and the U.S. dollar was spiking.
The trade was simple: Who wants to go long into a weekend filled with uncertainty?
In terms of the ES’s overall tone, the weakness was broad. In terms of the ES’s overall trade, volume was decent at 2.4 million contracts traded.
Technical Edge
- NYSE Breadth: 65% Downside Volume
- NASDAQ Breadth: 71.4% Downside Volume
It’s been an interesting situation with the breadth. On the up-days, breadth has been impressive. On the down days — particularly lately — breadth has held up.
| Thursday % | Upside Breadth | Friday % | Upside Breadth | |
| S&P 500 | (1.8%) | 30% | (1.9%) | 34.7% |
| Nasdaq | (2.1%) | 26% | (2.8%) | 27.6% |
Two things. First, despite big losses on both Thursday and Friday, neither NYSE or NASDAQ breadth gave us an 80%-plus downside when it easily could have given us back-to-back measures in excess of 80%.
Second, notice how breadth actually improved on Friday even though the losses were deeper. Something interesting to think about.
Game Plan
There are a million things going on right now and to look at the S&P and see it higher YOY is actually impressive. For now, inflation and the Fed are taking a back seat to the Russian-Ukraine situation.
I’m not a geopolitical expert. However, if there’s an invasion, stocks go down. If not, they go up. You don’t need me to tell you that, but that doesn’t mean it isn’t the truth.
If there is an invasion, well, it’s the most well-telegraphed one I’ve ever seen.
S&P 500 — ES Futures
- Feel free to extrapolate this layout to the SPY.
The ES began this week under pressure but has since bounced on some encouraging headlines out of Eastern Europe.
Right now, last week’s low at ~4393 is a line in the sand. While it cracked this morning, it’s holding now. If they sell the open, watch to see how this level is handled.
If it can’t hold as support or isn’t quickly reclaimed, the overnight low at 4354 is on the table (that O/N low came right at the 61.8% retracement of the current range (not shown, but interesting)).
On the upside, the 200-day looms near 4445 and above that, the declining 10-day and 21-day moving averages are near 4470.
Remember to go one step at a time, level to level.
Nasdaq — NQ Futures
- Feel free to extrapolate this layout to the QQ.
The NQ is not holding up as well as the ES, but the premise is similar.
Bulls want to see the NQ hold last week’s low at 14,181. A break and failure to reclaim it puts the O/N low in play at 14,031. On the upside, look for a reclaim of the Q4 low. Above could open the door to the 14,500 to 14,600 area.
Longs are trying to accomplish a higher low in both indices, but the headlines and backdrop don’t make it easy. If a retest of the lows is on deck, the NQ could revisit the 13,900 area, where solid support came to life last month.
Individual Stocks & Go-To Watchlist —
Feel free to build your own trades off these relative strength leaders
It’s not what people necessarily want to hear, but I’m not in a huge rush to put on trades in individual stocks. I like sticking to the indices when volatility cranks up because the moves in the individual stocks can be too unpredictable.
We had some good trades last week and Friday had that really nice short in TSLA and a good long in XOM.
That said, here are the ones that continue to trade well on the long side.
Go-To Watch List
- BAC, WFC and other banks are trading well. ASB, MET, MS
- Energy — HAL, OXY, XOM, CVX — huge move on Friday. See how this a.m.’s dip is handled.
- BRK.Ba
- ABBV — chart looks great (see below). 261.8% extension is $147-ish
- CVS — at the 50-day in the pre-market
- DE
- TD — looking for a test of the 10-day and the $83 to $83.50 area.
- V & MA — Resetting now. See if a bid comes in soon
- BROS
- MKC
ABBV
Undercutting yesterday’s low in the pre-market now, I am looking for either a gap-down and reclaim of Friday’s low at $141.54, or a tag/bounce from the 10-day.
Economic Outlook
As we all know, there’s no crystal ball when it comes to trading stocks, options, or futures. But the Market Imbalance Meter may be as close as it comes. Knowing how the “Big Money” is placing its bets can give our trading room a big wave to ride — or a warning sign to stay out of the water. Come check it out now, risk-free for 30 days.
Disclaimer: Charts and analyses are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.
Remember: Not all setups will trigger. Not all setups will be profitable. Not all setups should be taken. These are simply the setups that I have put together for years on my own and what I watch as part of my own “game plan” coming into each day. Good luck
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